CHAPTER
3
Co-creating the Future
Innovation is still often associated with the lone creator working late at night in search of inspiration. If only innovation were that simple. Contemporary innovation is a team sport. Among the leading intellectual players in establishing this was Coimbatore Krishnarao Prahalad, better known as C. K. Prahalad. Prahalad (1941–2010) was the Paul and Ruth McCracken Distinguished University Professor of Corporate Strategy at the Ross School of Business at the University of Michigan. In the 2007 and 2009 Thinkers50, he was ranked number one—a position he retained until his untimely death in 2010.
Prahalad introduced the term core competencies to the management lexicon, and his bestselling book Competing for the Future, written with Gary Hamel, set the strategy agenda for a generation of CEOs.
In 2004, Prahalad published two books: The Future of Competition (subtitled Co-creating Unique Value with Customers), written with Venkat Ramaswamy, introduced the notion of co-creation, while The Fortune at the Bottom of the Pyramid (with the ambitious subtitle Eradicating Poverty Through Profits) argued that the world’s poor (the “bottom of the pyramid”) represented an untapped market that was worth up to $13 trillion a year.
In The Future of Competition, Prahalad and Ramaswamy assert: “We are moving to a new form of value creation, where value is not created by the firm and exchanged with customers, but where value is co-created by the consumers and the company.”1
Prahalad and Ramaswamy explained what they believed was a fundamental shift: “Business competition used to be a lot like traditional theater: On stage, the actors had clearly defined roles, and the customers paid for their tickets, sat back, and watched passively. In business, companies, distributors, and suppliers understood and adhered to their well-defined roles in a corporate relationship. Now the scene has changed, and business competition seems more like the experimental theater of the 1960s and 1970s; everyone and anyone can be part of the action.”2
Relationships between companies and their suppliers and distributors were blurring, Prahalad and Ramaswamy argued, with the different groups sharing more information and collaborating on innovation. Walmart, for example, no longer simply distributes Procter & Gamble’s products but also shares daily sales information, and the two companies collaborate to ensure efficient warehousing and replenishment of stocks. This was an example of how companies working together can co-create value.
To some extent, of course, companies have always cooperated with their business partners to introduce innovations. But the big change heralded by Prahalad and Ramaswamy was the growing importance of co-creation with customers.
The Grand Alliance
“The changing dynamics of business has been the focus of managerial debate the past few years. Practitioners and scholars talk about companies ‘competing as a family.’ They talk about alliances, networks, and collaboration among companies. But managers and researchers have largely ignored the consumer, the agent that is most dramatically transforming the industrial system as we know it,” Prahalad and Ramaswamy note.3
It was the changing role of customers in the innovation process that co-creation championed. The active participation of customers in the creation of new products and services—enabled by the Internet in particular—is transforming how value is created and innovation occurs.
“The market has become a forum in which consumers play an active role in creating and competing for value,” Prahalad and Ramaswamy observed. “The distinguishing feature of this new marketplace is that consumers become a new source of competence for the corporation. The competence that customers bring is a function of the knowledge and skills they possess, their willingness to learn and experiment, and their ability to engage in active dialogue.”4
Prahalad, whose earlier work with Gary Hamel gave managers the language of core competencies, was now arguing that the ability to co-create and innovate with customers was the new competencies frontier. Companies that mastered co-creation would have a competitive advantage in the realm of innovation and customer satisfaction.
Some industries were further down the road than others in terms of developing these new competencies. The software industry, for example, has long sought to involve its customers in the innovation process, moving from testing new products in usability labs to testing them in customer environments. For example, millions of customers have tested beta versions of successive Microsoft Windows operating systems. These beta tests help the company identify and fix glitches in the early versions of the software and also help retain customer loyalty.
Other technology companies, such as Cisco Systems and some computer game developers, have gone even further, providing customers with open access to information, resources, and systems. Some game developers, for example, provide mapping and tools to allow customers to design their own battlefields and customize the look and feel of virtual characters.
So how can companies develop the competencies to co-create with their customers?
Prahalad and Ramaswamy identified four new imperatives:
• Encouraging active, explicit, and ongoing dialogue
• Mobilizing customer communities
• Managing customer diversity
• Co-creating personal experiences
Computer gaming companies like Blizzard Entertainment, the makers of World of Warcraft, routinely provide the tools to allow consumers to customize their characters and their environment. For example, the customer can choose whether he or she wishes to be an orc, a dwarf, a troll, or one of several different elven races, from night elf to blood elf.
These are all types of co-creation. But the idea extends far beyond the software industry. In particular, Prahalad saw an increasing role for consumers in shaping and creating their own value in areas such as healthcare. As he presciently observed:
The availability of medical information on the internet and elsewhere is helping more and more patients enter into a dialog with their doctors. The more knowledgeable they become, the more likely these customers are to shape their healthcare regimen. Doctors may resent the consumer’s exercise of his or her knowledge, but they would do well to learn how to co-opt it.
Prahalad was also prescient about the growing availability of personal data. He believed that, as customers and patients, we would soon be able to co-create a personal health profile with our healthcare providers. He believed that at some point, it would be possible for someone with diabetes, for example, to collaborate with a doctor and receive a personalized warning if his or her blood sugar had dropped to a dangerously low level. Such a co-created health innovation would save many lives.
New Age Thinking
In his final book, The New Age of Innovation (2008), coauthored with M. S. Krishnan, Prahalad took the notion of co-creation further, describing a new competitive landscape based on two simple principles: N = 1 and R = G.
We interviewed Prahalad on a number of occasions. He, too, saw these interactions as an opportunity for co-creation. At the end, he always turned to the camera operators and asked what they had thought of the interview. Their ideas mattered to him; their views were an opportunity for him to learn:
You grew up in India as one of nine children. What did those early experiences teach you?
Growing up in India is an extraordinary preparation for management. You grow up in large families, so you always have to make compromises; you have to learn to accommodate. And India is a very diverse culture in terms of languages, religions, and income levels, so you start coping with diversity at a very personal level as a child.
The second point is that I was lucky because my parents were very academically oriented. My father was a judge and a great scholar. He told us very early in life, “There is only one thing that when you give more, you have more—and that’s knowledge.” That has stuck with me.
Then, in the Union Carbide plant, I had to work with communist unions. I had to set rates—I was a young industrial engineer—and negotiating rates with the unions taught me a lot. They were very smart people, they were very thoughtful; and if you were fair and honest, you could deal with them in an interesting way. So it taught me not to think of these groups as adversaries, but to collaborate, be honest, and be fair.
Running through your work is the idea of co-creation. Can you explain what it means?
Co-creation is an important idea. What it says is that we need two joint problem solvers, not a single problem solver. In the traditional industrial system, the firm was the center of the universe, but when you move to the new information age, consumers have the opportunity to engage in a dialogue and be active, and therefore, they can shape their own personal experiences. So, with co-creation, consumers can personalize their own experiences and the firm can benefit. And this is becoming much more common and possible today.
What would be an example of that?
Let’s take Google; everybody Googles now. But if I look at Google, it does not tell me how to use the system. I can personalize my own page; I can create iGoogle. I decide what I want. Google is an experience platform. Google understands that it may have a hundred million consumers, but each one can do what he or she wants with its platform. That is an extreme case of personalized, co-created value. Our shorthand for that is “N = 1.”
On the other hand, Google does not produce the content at all. The content comes from a large number of people around the world—institutions and individuals. Google aggregates it and makes it available to me. That is the spirit of co-creation, which says that even if you have a hundred million consumers, each consumer experience is different because it is co-created by that consumer and the organization, in this case Google. So resources are not contained within the firm, but accessed from a wide variety of institutions; therefore, resources are global. Our shorthand for that is “R = G,” because resources are now coming from more than one institution.
So, N = 1 and R = G are going to be the pattern for the future.
How do these two principles apply to an organization, perhaps a large healthcare organization?
If you take what happens in a hospital, or what happens to me personally as someone who wants to maintain good health, each one of us is unique. We each have our own history of good health and health problems, so there are data about me personally. There is nothing that stops the doctors who treat me from taking me aside and discussing the risks and the benefits of following a certain regimen.
Can you give me an example of that?
Episodes of illness increase the cost of the healthcare system. So if you want to reduce the cost, you have to focus on wellness, and wellness requires the N = 1 approach. That’s because we’re all different and we all have different propensities for disease—genetic and also lifestyle. So you have to get to that level.
For example, if people are a little bit obese, the doctor might alert them to the fact that they are susceptible to type 2 diabetes, that cardiovascular disease and high blood pressure are issues that they have to worry about. They can do that today.
So, for example, my doctor and I could look at my medical records and my episodes of illness and discuss a regimen to keep me healthy. That is a co-created regimen. The doctor cannot tell me to walk four miles every day because if I’m living near a rundown area, that may not be very wise. On the other hand, the doctor can make an arrangement for me to go to a gym so that I can exercise. Thus, I follow this regimen and the doctor keeps track of me.
How could you take that further?
Well, let us assume that I go to the next step; let us assume that I am a heart patient and I have a pacemaker. The doctor can say, all right, this is the bandwidth within which your pacemaker must operate, and, with your permission, we’ll remotely monitor you. If something goes wrong, we’ll send you a message, through a cell phone, through a PC, through the regular phone, or by sending somebody, telling you to get to the hospital because we need to treat you, or telling you to rest for two days. So the doctor can become my personal friend.
So that’s the N = 1 part. What about R = G? How does that apply to a healthcare service?
Health is so important to all of us that it is critical that we get into an N = 1 way of thinking. We cannot continue to treat patients like they’re an assembly line. But the R = G is more interesting. It says that the hospital can create an ecosystem where it doesn’t do everything.
For example, I may have a social worker come and talk to me, or talk to women who are pregnant on what they should do to have a healthy baby. The hospital could have a relationship with an ambulance service, a relationship with a dietician, all kinds of relationships. For example, with type 2 diabetes, you can have testing labs that are not necessarily in the hospital. So as the patient I don’t have to go and stand in a big queue.
So the hospital is part of a wider ecosystem?
Yes. The hospital can build a whole ecosystem of low-cost suppliers connected to the hospital, where the hospital becomes the nodal institution that sets the standards, that sets the parameters on how health security and privacy will be dealt with, and that also provides the system through which everybody gets paid for doing this. So the whole idea in healthcare is to help move away from treating illness to treating wellness and creating wellness. If you start from that perspective, then N = 1 and R = G become eminently possible—in fact, required.
What do these new ways of thinking about innovation mean for the way we lead? How do they change leadership?
I would say that there are three very important distinctions. First, leaders must lead. You cannot lead unless you’re future-oriented. Leadership is about the future, it is about a point of view about that future, and it is about hope.
So that’s the first point. And the other changes for leaders?
The second point about leadership is that it’s not about the leader. The metaphor I like to use is that of a sheepdog, not a shepherd. A sheepdog has to respect some rules. Number one, you always lead from behind. Number two, you can bark a lot, but you don’t bite. And, number three, you don’t lose any sheep!
So, in other words, a leader is somebody who can bring out the best in you, not the best in him- or herself. That is a very different view. It’s what Gandhi did. If you really think about Gandhi, looking at him, looking at his physical stature, looking at his clothes, nobody would have said that he would make a fundamental imprint on human history. But he was a great innovator—his leadership was about change; it was about hope; it was about freedom; it was a very personal thing. He made every Indian realize his or her own personal ability to contribute to that effort. And, very important, he set some nonnegotiables. It was not an armed struggle, it was a peaceful struggle, and that was nonnegotiable. So that would be my third principle: some things are nonnegotiable. Moral authority comes from having clear nonnegotiables. And that takes courage.
So for me, leadership is a point of view, the ability to mobilize people and make them achieve their very best and to have moral direction. It’s not technological capability and economic strength; it’s morality as well.
Innovation with Customers
There are two sources of co-creation that can compete for being the most overlooked: customers and employees. Increasingly, there is talk of the importance of improving employee engagement in order to harvest employees’ bright ideas and creativity. On the customer front, there has been growing emphasis on the importance of the customer experience as a means of innovating with customers.
Among those championing a better understanding of customers as a route to innovation is Bernd Schmitt, the Robert D. Calkins Professor of International Business at Columbia Business School and author of Big Think Strategy: How to Leverage Bold Ideas and Leave Small Thinking Behind (2007). When we talked with Schmitt, we began by asking him about the customer experience.
How has the customer experience changed over the last decade?
It has improved. Retailing is entirely different from 10 years ago. Take a casual clothing line such as Abercrombie & Fitch—the way it markets itself now in the retail space is entirely different. But it’s not only about retailing. It’s also about communications. It’s about websites. So, the customer experience is a hot topic, and lots of companies are working on it. They’re creating management positions within their organizations to create experiences for customers.
Is there one customer experience, or does it change with countries and cultures?
There’s no doubt that there are cultural differences. An experience that might work in the United States may not work in Europe or Asia. So, you have to be very sensitive to customer trends, their needs and lifestyles, all of that. That’s the exciting thing about customer experience management: you can never say, “We’ve fixed the experience now; this is how it is.” You always need to update it; you always need to upgrade it.
Living in New York, I think it is natural to focus on the customer experience, because there are lots of interesting experiences around one, both in people’s daily life and also commercially. When you look at the retail environment, for example, when you have contacts with the advertising agencies and the communications businesses, you can’t help but think that marketing is not only about rational things and stressing product characteristics and product specifications, but also about having to be creative and unusual in the approach that you’re using with your customers. New York is a great laboratory for studying what’s going on with customers, but it’s only one laboratory. That’s why I travel a lot. Being a city person, I like to compare how companies market themselves in different parts of the world. There are many different industries, companies, and countries; so, without a doubt, there are many different kinds of customer experiences.
China is really improving a lot of customer experiences. Think about the Maglev, the high-speed train in Shanghai. It’s mostly a Siemens product, but in Munich, in Germany, they never put it on the tracks. In Shanghai, they have done it! It’s a great experience to be in the city within 10 minutes, and there are many other ways in which China is helping to improve what it feels like to be a customer. Recently, when I went to China, right after I went through customs, an illuminated rating scale asked me to rate the officer in terms of how satisfied I was with the experience. That is world-class customs service. So, there are lots of interesting things going on in China with respect to experience management.
If the customer experience has improved in the last decade, where’s it going next?
I think the customer experience will change in several ways. First of all, customers are very concerned about going green and buying green products, and about companies being serious about being green. So, we will be seeing a lot of changes in this regard from companies that are trying to win the hearts of consumers. I also believe (and this is a major change) that customers will want to be more casual and more connected—even emotionally connected—with companies. They don’t want to do business with big, anonymous conglomerates that they don’t know anything about and that may be behaving in unethical ways. So, I think we’ll see a lot of more interactivity and openness in the transactions between companies and consumers.
So customers will come to expect more from companies.
That’s right, and that is a challenge for experience management. When expectations increase, companies have to live up to the new expectations, and that requires a new management style. Management needs to be constantly in touch with customers, understanding what they expect and responding accordingly. But this is something that will make companies better.
This all sounds like something that would be hard to teach in a classroom. Is it?
I sometimes bring customers into the classroom. That’s number one. Companies should be doing the same thing; they should bring customers into their organizations. Also, I teach my students a lot of the new technologies and the new research methods that are focused on customer insight—for example, methods that involve running focus groups not in a laboratory, which is an artificial environment, but in stores. So, we talk about research techniques in my class, and we practice them. And I sometimes take students into the field. We do a retail tour in New York City and watch what’s going on—observing customers in their natural environments (something that I think companies should also be doing). I think these are great techniques for understanding customers and for understanding the customer experience. The classroom is a great starting point for learning about customers.
Some companies treat customers poorly. Do you have a sense of why they allow themselves to lag in this area?
I think what’s holding them back is that many companies are still very bureaucratic. Sometimes they are afraid to interact with customers and perhaps discover that customers don’t like the way they have been treated. I think that’s the major reason: fear of the customer. Think about it. Customers can be very frightening because they can be very demanding. And you may not want to know about it. You think you have much more control if you are just staying inside the organization.
The customer experience is a major factor in any company’s strategy, so, ignoring customers is shortsighted. All my work has been about creativity and doing new things. Customer experience is about innovation with respect to the customer. My book Big Think Strategy is, more broadly, about how to be innovative, how to develop an innovative, creative strategy within the organization. In the book, I give managers tools on how they can source bold ideas, turn them into a strategy, and launch that strategy.
What if managers are not just shortsighted, but stuck?
I remember going to a hairdresser in Hong Kong, and he asked me where I part my hair. I told him, “On the left.” Then he asked how long I had been doing that. I said, “I don’t know—40 or 45 years.” And then he said, “You won’t for the next 40.” This was a great inspiration for me. What he was doing at that moment was, in a way, killing a sacred cow: that I had parted my hair on the left and never thought of doing it any other way. And in companies you have lots of these sacred cows, things that they have always done in a certain way. And they therefore believe that these things must be done that way. Everyone makes certain assumptions that are never questioned—managers, too. It can be very enlightening for a company to make a list of those sacred cows and then come up with alternatives to the ways that things are done. In such a process, many managers come to realize that there are often no good reasons for doing a lot of things the way they have always been done.
Have you tried this exercise with managers?
When I do workshops with organizations, managers can easily come up with a list of 20 or 30 sacred cows involving how with the company deals with operations, marketing, and new product launches. They come up with these sacred cows, and then they develop alternative ways of managing such important tasks. Not all of those alternatives will be a great improvement on the way things are done at present. The alternative ideas have to go through an evaluation process, and so on, but this is one way of sourcing bold ideas. The exercise usually pays off with many new ideas that can be implemented.
Are companies structured to think big?
Most companies are extremely conservative. They are also very bureaucratic. They are usually organized in silos that don’t talk to one another. When you do a big think strategy, you need to break through that; you need to break down the silos. And you need to have procedures and tools on how to source bold ideas, such as looking outside the business. A technique that I use a lot in my workshops is to ask managers to perform outside-industry benchmarking. Many companies benchmark within their industry—airlines look at other airlines—but they also need to get ideas from the best performers in other industries and what they’re doing.
All of this requires bold leadership, does it not?
I’m very interested in leadership these days. The notion of leadership as something analytical—about decision making in a status quo situation in which one chooses the best possible option—is only one particular part of leadership. Another part of leadership is to look into the future, to be creative, to create new worlds. For that, companies need different leadership skills.
Can you help them learn new leadership skills?
The companies I work with hire me to help them to grow, to see the world in new ways, to imagine new realities. Most businesses have a leadership team with some conservative, status quo–oriented managers working along with those who really want to revamp their business. Of course, if the business is in a dynamic industry, then the company has no choice but to think outside its current operational and strategic box. Either way, developing a big think strategy can be helpful.